GDP falls by 0.2% - are we heading for a double-dip?

New figures show the UK economy shrank in the final three months of 2011. But it doesn't necessarily mean all is doomed.

When Mervyn King said yesterday that the UK faces an 'arduous' path to economic recovery, he was probably hinting at this: figures out this morning from the Office for National Statistics have shown that the UK economy shrank by 0.2% in the final three months of last year, worse than the 0.1% drop expected by analysts. It's the first fall in GDP since the final quarter of 2010, when freezing conditions were blamed for shoppers failing to get out and spend - which might give us a clue as to what's going on here.

Remember retailers' complaints just before Christmas that it was so warm they couldn't shift any of their lovingly-knitted jumpers? The fall in GDP was partly driven by the service sector (including retailers), which ground to a halt as heavy cost-cutting began to take effect, plus a 4.1% drop in electricity and gas production as people turned their heating off - both of which point to environmental, rather than economic reasons for the fall. November's public sector strikes, which lost a million working days, probably also had an effect.

On the other hand, there's the manufacturing sector, which contracted by 0.9% during the last three months of 2011, suggesting something more than a balmy winter is the problem. Of course, events in the eurozone are bound to have some effect on the number of orders received by our manufacturers. And given that the Government has spent the last few months insisting that much of the recovery depends on the manufacturing contingent, that's not good news. Neither is the fact that, austerity measures notwithstanding, the UK's national debt has now breached the £1tn.

But it's not surprising news, either. Indeed, in his Autumn Statement back in November, George Osborne even warned us that a recession might hit at the beginning of this year as the eurozone crisis begins to take effect. And it's important to point out that we're not in a double-dip just yet: as any school-age child could tell you, a recession only comes after two quarters of negative growth.

Of course, the severity of what happens over the next few months (and it's worth pointing out that dozens of economists have braced themselves for a full-blown recession) depends on what happens in the eurozone. And the International Monetary Fund has turned up the heat on the European Central Bank to help troubled Greece out of hot water - again.

The disagreement centres around the ECB's insistence that Greece must pay the 40bn Euros of debt the Bank owns in full, while private holders of the country's bonds have had to put up with writedowns of up to 50%. Now, the ECB says the IMF has given it a rap on the knuckles, maintaining it must accept similar writedowns (although, confusingly, an IMF official has insisted it's saying nothing of the sort).

Nevertheless: what's worrying is that the IMF has decided that the 130bn Euro bailout decided in October isn't going to be enough to help Greece reduce its 350bn Euro debt by 2020. There are three possible outcomes to that: bondholders agree to even more losses - which could expose banks to even more risk; European governments plough even more money into bailing out the country; or the Eurozone finally puts Greece out of its misery (which has, for the first time, been hinted at by German chancellor Angela Merkel this morning). Either way, the consequences aren't great.